Oil prices are at it again. In June 2011 rates have dropped almost 20 percents from the $114 high that it touched 4 months earlier. Going by the current trades, oil prices are hovering slightly below $98 as we enter the third quarter of 2011. The media, scrambling for an explanation it seems, has been quick to attribute these rapid fluctuations in oil price to the unrest in the Middle East and natural calamities across the globe such as the Japanese earthquake and tsunami. But the Federal Trade Commission (FTC) begs to differ. In fact, extreme fluctuations in oil prices over the last few months have led the Federal Trade Commission to launch a full-fledge investigation into the oil and gas markets.

FTC Investigation

The FTC wants to find out if there has been any kind of anti-competitive conduct or any price manipulations responsible for this. Many see the price variations as a ploy on part of the oil companies to boost profits rather than in keeping with the market trends. The FTC investigation was triggered due to the fact that the oil industry displayed major profits despite claiming decreased usage of capacity. The investigators will analyze why the refinery operators decided to close down some equipment for maintenance. Such a move often translates into a spike in oil and gas prices. The utilization rate this year was the lowest for the same period in nearly three decades. In view of these concurrent events, price manipulation seems quite plausible.

Politics of the Move

Democratic senators have endorsed the FTC move to conduct a thorough investigation into the matter. This is in sharp contrast to the situation in mid 2008 when oil prices touched $145 while George W Bush was the President. An oil man from Texas, Bush was renown for his affinity to the oil industry and so was vice-president Dick Cheney, formerly the CEO of Halliburton, one of the largest oil servicing companies. Consequently, it seems, the previous administration was least bothered about looking into possible price manipulation. But in 2008 the dynamics of politics have shifted and the Obama administration is not so much at a conflict of interests. As a result of this shift, the government set up a task force comprising federal and state agencies to probe the matter.

Refineries or Speculators

Though the Democratic senators have pointed the finger of suspicion at oil refiners, the FTC has stated it will not restrict its investigation to just one aspect. Oil producers, transporters, marketers, and traders will all come under the scanner. Furthermore, the FTC stated that it will also verify whether any of these have been feeding misleading information about the price of oil to any federal departments or agencies. The FTC is acting under new regulation known as the "Petroleum Market Manipulation Rule" which came into effect in 2009.

FTC investigators have been granted the authority to request and obtain all documents pertaining to the shutting down of some refineries. Once guilt has been established, the FTC also has the power to impose penalties on the companies that adopt such unethical practices. Oil speculators have also come in for their share of the blame for fluctuating crude prices. It is estimated that today about 80 percent of oil futures are in the hands of speculators whereas this figure stood at about 35 percent back in 2001. Independent analysis has demonstrated that the price of each barrel is inflated by at least 8 cents for each million barrels of oil controlled by speculators. Given this data and the current volume held by speculators, the fair price of a barrel of oil should be somewhere between $60 to $70. Needless to say, the impact of speculators is significant: if crude was at $70 then the price of gas at the station will come down to about $2.70.

Defensive Claims

The International Energy Agency (IEA) has come to the defense of the refiners by stating that record low utilization of refineries does not mean that gas and oil prices are being manipulated. IEA representatives backed the oil industry claims that global demand and supply were responsible for the spikes and dips in the oil price graph. This gave some credibility to the stance of oil traders that recession, greater unemployment, and mixing of ethanol into motor fuel had weakened demand for gasoline causing the refineries to stay put.

The IEA has also disbelieves that speculation was largely responsible for the volatility shown in gas prices of late. Agency representatives attribute this to the fact that speculative trading in oil has been lackluster over the past two years. Refiners' trade groups have termed the investigation a waste of time and money.

More Regulations, Absence Of Enforcement

Although full of good intents, this investigation will likely not result in any punitive action or affect any trader's practice. By comparison, 100 years ago, President Theodore Roosevelt lived by his slogan "Speak softly and carry a big stick". Through matching his word with action, President Roosevelt became the first American to earn a Nobel Peace Prize. Now nearly 100 years later President Obama, also a Nobel Peace Prize winner seems intent to follow the opposite slogan: "Be loud and carry no stick".
A leitmotiv has emerged over the last few years plaged with crisis (all caused by lack of enforcement). First in response to the banking crisis, many new regulations were put in place. But the already existing regulations would have averted the crisis, had they been enforced. The BP spill is another example: legislators were quick to push new deep-water drilling regulations whereas the existing regulations would have averted the disaster, had they also been enforced.
Whatever the FTC concludes will likely follow the same pattern. New laws, regulations will supercede existing ones with either no clear way to enforce them, or whose enforecement will hinge on officials eyeing a second career in the private sector, thus causing a conflict of interest and creating an incentive to "carry no stick". Instead of examining the root causes of the matter and bringing the real culprits to book, an easy scapegoat might be targeted and made an example of. For many it will feel like not all are equal under the law, and rightfully so.

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